Wednesday, August 22, 2012

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In the stock market it's never easy to find a stock that will give you good consistent profits year after year. However, if you follow some basic and simple rules, you can choose winning stocks that will perform well over the long term. You can get good profits from some stocks over a five and ten year span. Here is a list of simple rules to follow when choosing a stock as an investment.

Never Buy What You Like

It's too easy to get "married" to your stock picks, and not be objective about them. This becomes worse if the company makes a product you're already in love with. Keep in mind, market factors go way beyond love for a product. Your company might make the best widget in all the world, but if it's a poorly managed company, it will sink. If you're a big fan of Starbucks Coffee, do not buy Starbucks stock. If you're part of the Apple religion who worship at the alter of over-price products bearing a fruit logo, then you should not buy Apple stock. When the ship starts to sink, you won't be objective about it, and you probably won't cut your losses and sell. Buy a smart stock that you're not already in love with. If XYZ Copper company starts to go under, you can probably be more objective and cut your losses, sell and move on.

Look for Low Volatility

Stocks whose price moves in small increments, low volatility stocks, are better for the long haul. We tend to like the new bio-tech or maverick companies that fluctuate greatly in price every day. We like to see our investment rocket 40% or more, but these stocks have a greater tendency to fail. The same move up 25% can also crash 50% just as fast. I remember the Taser company (TASR) was the darling of Wall Street in 2004, and it rocketed from $25 a share to $100 in just a few months. Daily movements were erratic. When the dust settled, and the corporate profits weren't as bright as expected, the stock tanked to $4. You would have better off with the boring Coca Cola Company (KO), as it moves a few cents a week; very boring, but stable.

Dividends

If you plan to hold the stock for 5 or 10 years, look for dividends. You'll want to earn some interest during those years. However, look for low dividends, as these are not likely to be cut. Unreasonably high dividends run the risk of being reduced, which would cause a sell off in the stock. I like to look for solid companies paying 1 or 1.5% in an annual dividend.

Moderate P/E Ratio

The P/E is the Price/Earnings ratio. Look for low or moderate P/E ratios. You want the price to be selling at a fair ratio to the earnings. You can find the P/E ratio for any company at Yahoo Finance or any other financial quote site. Your broker can also give you a list of low P/E companies.

Diversity

Look for companies that make a wide range of products. If a company only makes left-handed scissors, they might not be well situated for dips in the economy. However, if they also make chewing gum, glue and paper supplies, you've got some diversity that might see them through the tough times.

Longevity

Look to buy stock in companies that make products likely to be useful as times change. Technology sensitive products, such as satellite radio and e-book readers, might not be around 10 years from now. Products like candy, chewing gum, paper, oil, and gold have a better chance of still being big sellers in 2022. Looking back, not all the typewriter companies survived the move to computers, and many newspaper companies are struggling now against the internet. Find a company that doesn't need to evolve, because they already have a product that can survive the test of time.

Avoid Hot Picks

Finally, look for companies that are consistently recommended by the experts year and year. Stay away from "Hot Picks" of the week. Most of these "Hot Picks" will spike and disappear. Find the well-managed rocks of Wall Street.

More from this contributor:

Planning Your Year End Investment Portfolio

Forex 5 Minute Scalping Strategy

Quick Start Guide to Extra Income with Covered Calls


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